1. (SBU) Summary: In cordial meetings with Jared Ragland, Director
of the U.S. Trade Representative's Office of Intellectual Property
and Innovation, Guangdong provincial and municipal officials
described recent successes in enforcing intellectual property rights
(IPR), as well steps they plan to take to further strengthen
enforcement and their willingness to work with the U.S. Clearly
problems remain and U.S. IPR owners detailed their frustrations with
enforcement mechanisms and procedures. End summary.

2. (SBU) Guangdong Intellectual Property Office (GD IPO) officials
described how Guangdong is building an innovation-based society and
the role of its "IPR Strategic Plan," enacted in 2007. Wang Hu,
Deputy Director of the Coordination and Administration Division
pointed out that Guangdong ranked first again in the number of
patent filings last year, as it had for the past thirteen years. He
also highlighted four IPR-related initiatives under way:

--Promoting IPR public awareness through IPR Protection Week in
China. IPR Protection Week starts on April 20, and culminates with
World IPR Day on April 26. GD IPO released its "White Paper" on IPR
protection progress over the past year on April 24.

--Educating students in primary and middle schools, and universities
to respect IPR. In 2002, GD IPO began IPR education by including
information on the concept and practice in local textbooks in
Guangzhou. By 2006, the program was expanded to the entire
province. Separately, three universities in the province have
established IPR curricula: Jinan University, South China Institute
of Technology, and Sun Yat-sen University.

--IPR enforcement through administrative means. GD IPO handles
administrative patent enforcement, and penalizes those who attempt
to pass themselves off as patent holders. GD IPO also governs the
IPR complaint centers at the Canton Trade Fair in the spring and
fall.

3. (SBU) In a meeting with AIC officials, Director Ragland commended
the agency's success in disrupting the storage and selling of
counterfeit automotive parts. The Quality Brands Protection
Committee (QBPC) deemed this case to be one of the twelve best IPR
cases for 2007 and 2008. Guangdong AIC Deputy Director General
Jiang Haiping pointed out that the AIC has strengthened protection
of "famous trademarks," as well as well-known foreign brands. In
2006, the Guangdong AIC cracked down on several trademark
counterfeiting rings concerning Nike footwear worth several million
renminbi (RMB). The AIC also was active in protecting the
trademarks of DuPont and General Motors. Jiang noted that, as of
the end of 2007, 380,000 trademarks had been registered in Guangdong
Province; the province has led all of China in trademark
registrations for the past twelve years.

GUANGZHOU 00000244 002 OF 005

4. (SBU) Jiang also emphasized AIC efforts to clean up wholesale and
retail markets. Since March 2006, when the Guangdong AIC launched a
campaign against trademark infringement in large local wholesale and
retail markets, the AIC has opened 95 cases, of which 47 concerned
American trademarks, leading to the seizure of 1.25 million
counterfeit products. Five cases were transferred to the Public
Security Bureau (PSB) for criminal prosecution. Affected American
trademarks include Nike, Levis, Oil of Olay, Mickey Mouse, the
National Basketball Association, and Procter & Gamble.

5. (SBU) Officials at both the Guangdong IPO and AIC asked about the
coming Special 301 report for China. One AIC official commented
that the 301 Report was not helpful in promoting dialogue on the
issues. Director Ragland noted that U.S. law requires the
submission of the Special 301 Report as well as the National Trade
Estimate. He explained that the U.S. Congress plays an important
role in U.S. trade policy, and the 301 Report assists the Congress
in gaining a better understanding of our trading relationships. The
Report is a useful tool for the U.S. to help frame our bilateral
discussions on IPR issues and the preparation process is an open and
transparent one, he said.

Shenzhen Officials Tout Progress
--------------------------------

6. (SBU) During Director Ragland's visit to the Shenzhen IPO,
Deputy Director Wang Youming pointed out that the Shenzhen
Government had just released new initiatives aimed at strengthening
IPR protection. They also allow punitive damages in addition to
compensatory damages. Local rules have been amended to lower the
criminal threshold for corporate and individual infringement. In
addition, Deputy Director Wang said the Shenzhen IPO had provided
IPR training to the general public, especially for small and
medium-sized enterprises, as well for enforcement staff.

7. (SBU) Officials from the Economic Crimes Investigation Division
(ECID) of the Shenzhen PSB told Director Ragland that since 2003 the
ECID has worked on 466 cases, worth RMB 2.2 billion (about USD 300
million). They solved 239 cases and seized RMB 962 million of
counterfeit and pirated product. Each year, the ECID handles 70 to
80 IPR cases, accounting for only 3% of its case volume. Most of
the local cases concern trademark infringement followed by
trade-secret cases. Patent disputes make up only a small fraction
of the workload.

8. (SBU) ECID IPR Unit Director Wang described the division's work
in Operation "Summer Solstice" a copyright case involving
counterfeit Microsoft software originating from China. In a July
2007 joint action involving the FBI and the SZ ECID, raids were
conducted simultaneously in Dongguan and Shenzhen; 18 suspects were
arrested. Infringing copies of Microsoft products included
Microsoft Office 2003 and 2007, Vista 2007, and Windows XP, as well
as fake certificates of authenticity and packaging. Wang said the
pirated products were of unusually high quality. He also briefed
Director Ragland on the recent disruption of a sophisticated
trademark counterfeiting operation. Finnish Customs notified the SZ
ECID that counterfeit Nokia cell-phones were being traced to a
manufacturing facility in Shenzhen. The SZ ECID solved the case
with very limited information, apprehending the operation's leader,
Yang Zongqing, and charging him with counterfeiting the Nokia
trademark and selling fake Nokia cell-phones.

GUANGZHOU 00000244 003 OF 005

9. (SBU) Wang said the ECID plans to maintain a high profile on IPR
crimes. In 2006, it began a three-year training program for ECID
officers to help improve their abilities to spot and intercept
shipments of fake and counterfeit goods. ECID plans to promote
greater IPR public awareness through on-line updates and advice on
its web site. The agency also is working to improve the case
transfer mechanism between administrative IPR offices and the
police. The SZ ECID is establishing a dedicated IPR enforcement
team now that the Shenzhen Municipal Government has agreed to fund
40 new ECID positions. Lastly, ECIDs from other areas of China have
been exchanging information and best practices at seminars organized
by the Ministry of Public Security.

AmCham Delivers Good News
-------------------------

10. (SBU) The American Chamber of Commerce in South China (AmCham)
members continue to stress the positive business environment in
south China. AmCham President Harley Seyedin told Director Ragland
that despite some reports that Guangdong Province increasingly was
averse to foreign business investment (this would be certain kinds
of investment, of course, mainly in traditional manufacturing and
high polluting enterprises), American investment has continued at a
brisk pace; and the provincial government was working with domestic
and foreign business interests to maintain Guangdong Province as an
attractive investment area. AmCham's IPR Committee Chair, David
Buxbaum, also identified some strengths in the IPR protection
environment in south China. He told us that China had enacted some
very good and comprehensive laws on IPR protection. The problem he
saw was, at times, the lack of national as well as provincial will
to implement fully these laws. He noted also that China needed to
raise the salaries of judicial officials in order to insulate them
from corruption and to raise the stature of their offices.
Commenting that administrative IPR enforcement was relatively easy
and quick to obtain, he argued that American rights holders should
avail themselves of the civil remedies in China, and rely less on
criminal prosecution.

11. (SBU) In a group meeting hosted by the Consul General, major
U.S. IPR rights holders in the Pearl River Delta reviewed with
Director Ragland first-hand the challenges and issues facing
American firms in China. Representatives from Nike, Mattel,
Colgate-Palmolive, Motorola, and Procter & Gamble (P&G) attended.

12. (SBU) P&G (strictly protect) complained that seizures of
counterfeit product often are split into component parts, making it
difficult to meet the minimum threshold of entire units for criminal
prosecution. The company reiterated its view that the Shantou area
in eastern Guangdong is particularly egregious for failing to
protect IPR. The P&G executive commented that local government
officials appear willing to help, but the business community is not
especially interested in IPR protection, since counterfeiting is an
important part of the economy. Elsewhere in Guangdong province,
however, she noted that P&G has developed a good relationship with
the Luogang District PSB branch in Guangzhou, resulting in
substantial seizures of counterfeit P&G goods.

GUANGZHOU 00000244 004 OF 005

13. (SBU) Nike (strictly protect) reported more failures than
successes. In February, Nike had reported some improvement over the
last year in Fujian Province (ref B). However, in March, the Fujian
PSB initially refused to conduct raids when Nike presented evidence
of infringement. When the raids finally occurred, no infringing
goods were found at the site, leading Nike to suspect collusion
between the police and counterfeiters. Company representatives have
not been allowed to attend raids to observe the seizure of goods.
Courts have failed to punish counterfeiters; the AIC has refused to
do its job; and the PSB has not accepted any cases for criminal
prosecution. In addition, the Nike representative said that no
agency in the Chinese Government has expressed willingness to handle
on-line sales of counterfeit goods. He emphasized corruption as the
root of the problem in south China. In one instance, the Kaiping
AIC refused to raid a location that Nike identified as a
manufacturing facility of counterfeit product. Later, it was
determined that a member of the National People's Congress owned the
building that housed the infringing operation.

14. (SBU) Motorola (strictly protect) complained about the lenient
sentences in the Guangzhou Kolvo trademark-infringement case, worth
RMB 7 million (about USD 1 million). The company worked with the
Guangzhou PSB's Economic Crimes Investigation Division. Nokia,
Sony, and Ericsson also joined Motorola's effort to stop the
counterfeiting of cell-phone handsets and it was likely this joining
of forces that precipitated action. The PSB arrested ten suspects,
releasing four of them before trial. Though the court found seven
defendants guilty, it then suspended all of the sentences, resulting
in no jail-time punishment.

15. (SBU) Mattel (strictly protect) representatives complained that
Chinese copyright protection is so weak and ineffective that it is
not worth pursuing any prosecution for this type of violation.
Chinese manufacturers reverse-engineer many of Mattel's toys, but do
not copy its trademarks, which would make enforcement easier.
Chinese design patents are not helpful in providing protection --
toys have a short commercial life, but obtaining the design patents
can take a full year. The executives also pointed out that monetary
penalties in administrative trademark enforcement are not enough of
a deterrent. Like P&G, Mattel singled out Shantou, especially the
Chung Hui district, as an area where many of its products are copied
illegally. In addition, the company complained that the quality of
judges is very poor; in a patent case heard there, a judge pressured
Mattel to settle after only one day of proceedings (judges generally
prefer mediation and conciliation to trials). In addition, the
judge concluded that Mattel seized only one toy during the raid from
which the patent suit arose, so it was entitled to compensatory
damages for one toy only. A Mattel representative noted that the
Shantou courts and the PSB frequently refused to seize toy-making
molds for infringing products, apparently because taking the molds
would shut down the factory and put people out of work.

16. (SBU) Colgate-Palmolive (strictly protect) reported that it
interdicts more and more counterfeit goods each year. The
Colgate-Palmolive representative said China Customs had become more
cooperative and was an increasingly important, but still not
completely reliable, partner in IPR enforcement. The role of China
Customs has expanded as more counterfeit Colgate-Palmolive products
are being exported to other countries, rather than sold locally.
Legitimate Colgate-Palmolive products are now widely sold in Chinese
big-box stores and grocery chains, making it much more difficult for

GUANGZHOU 00000244 005 OF 005

counterfeit products to breach supply-chain integrity.

17. (SBU) The group of rights owners generally agreed that it was
difficult to bring a civil lawsuit in China because it was so
time-consuming, with many administrative hurdles, difficult
evidentiary thresholds, and onerous documentation requirements. By
the time a plaintiff brings a case, the infringement may have ceased
or the issue may be moot. If a case were to be tried to judgment,
enforcing the verdict would be challenging. The group also agreed
that infringers were getting smarter, knowing how to copy without
tripping the criminal-liability threshold. One member of the group
observed that China craves stability. Counterfeiting creates jobs,
enhancing stability. If counterfeiting were to stop, many would be
thrown out of work, risking social unrest that the Communist Party
is unwilling to tolerate.

18. (SBU) Director Ragland toured the Lowu Commercial Center across
the street from the Shenzhen railway station, which has been the
target of numerous complaints from rights holders. A cursory look
at most merchants' displays found row upon row of stalls selling
counterfeit apparel, handbags, sunglasses, watches, briefcases,
computer games, and computer peripherals. Merchants also displayed
catalogs for consumers to peruse and order specific merchandise
bearing counterfeit trademarks not on display in the store. Lowu
Center is one of several shopping complexes where rights holders
have attempted to hold the market management responsible for store
lessees selling infringing products through landlord-liability
programs. As possible evidence of some success, several prominent
storefronts were shuttered and dark, with all merchandise removed.
On each of their doors was a sign that read in Chinese and English:
"Fake and unqualified seller of goods. Closed." In addition,
several large signs were displayed prominently in the main hall of
the complex, pledging to stop the sale of counterfeit and infringing
goods, and to pursue those who do.

Comment: South China Officials More Willing to Engage
--------------------------------------------- ----

19. (SBU) After recent frustrations in our efforts to work with
local officials on IPR or even get appointments, Consulate Guangzhou
was pleased that Guangdong Provincial and Shenzhen Municipal
Government officials agreed to meet with Director Ragland.
Officials at each of our meetings were cordial and courteous, though
several expressed concerns with USTR's Special 301 Report and the
analysis concerning Guangdong Province. Guangdong provincial and
Shenzhen city officials expressed a desire for greater cooperation
and interaction with USTR and the USG in general. Dr. Ragland
emphasized the USG's continuing interest in promoting intellectual
property protection in south China, and expressed hope that
cooperation would continue.